Do High House Prices Divert Manufacturing Investment Into Real Estate?

How much of the recent growth in Chinese real estate prices is driven by diver-sification of Chinese manufacturing companies into the real estate investment? In this paper I examine the sensitivity of Chinese manufacturing investment decisions to house prices. Using a simple theoretical model, I show that high house prices signal increas-es profitability of non-industrial-usage land investment, which increases investment by manufacturing companies in non-industrial-usage land relative to industrial-usage land. My empirical results are consistent with this theoretical result. By matching the Chi-nese NBS’s "Large and Medium Size Industrial Enterprise" database with a real-estate transaction database from land.soufun.com, I find that commercial property prices have negatively influenced residential-usage land purchase decisions, and positively influ-enced commercial-usage land purchase; residential property prices have positive effect on residential-usage land purchase. Moreover, manufacturing Profit rates have nega-tively influenced non-industrial-usage land purchase decisions.